Determinants of the Use of Fintech Finance Among Chinese Small and Medium-Sized Enterprises
Abstract
FinTech financing for businesses consists of two main components: crowdfunding and P2P lending. Crowdfunding is the funding of a project or venture by monetary contributions from a large number of persons. There are usually three parties in a crowdfunding arrangement: the initiator of the project or venture or the creator and known as the promoter; the organization providing the crowdfunding website or platform, known as the intermediary; and the individuals or entities that contribute or pledge money, known as contributors. Of the four known crowdfunding types, donation-, reward-, equity-, and debt-based crowdfunding, it is the latter two that are the most relevant to commercial enterprises, whereby contributors make a payment in return for an equity interest or lend money to the promoter who in return agrees to pay interest and repay principal on the loan. Examples include Kickstarter, GoFundMe, EquityNet, Indiegogo, RocketHub, and Crowdfunder.Second, P2P lending is the lending of money to businesses through online services that directly match lenders with bor-rowers. The business loans made can be secured or unsecured and are available for a wide range of purposes. In the case of both crowdfunding and P2P lending, the argument is that because the intermediaries offering these services generally operate online, they have lower overheads and provide lending services more cheaply than traditional financial institutions, resulting in lower borrower costs. Examples of P2P lending platforms include Lending Club, Prosper, Upstart, and Funding Circle
Analysis
Because of their inherent informational opaqueness and the limited finance sources available SMEs generally require special attention. SMEs are expected to
suffer more from market failures such as a relative inability to capture the profits from investment and uncertainty , leading to information asymmetries between firms and external suppliers of finance, resulting in financial constraints and underinvestment in Ramp;DCarpenter and Petersen , focusing on independent high-tech, small and young firms conclude that these firms are most financially constrained.
Westhead and Storey conclude more technologically sophisticated small firms are relatively more financially con-strained and that firm growth suffers as a result. Goodacre and Tonks offer a possible reason in that hi-tech SMEs are more likely to be of a novel type, so it is even more difficult for po-tential financiers to evaluate the investment. Finally, Storey and Tether concentrate specifically on new technology-based firms (NTBFs) and their enhanced need for external financing, while Mateut suggest that financially constrained firms are more likely to seek external support.Both crowdfunding and P2P lending are potentially able to mitigate the financial constraints and underinvestment for SMEs by alleviating information asymmetry and providing alternative financing sources with relatively lower levels of transaction costs for SMEs for the following five reasons. First, online platforms, which differ from traditional funding channels, allow financial service providers to offer a wide range of new services that remove intermediaries and administrative layers to make transactions more effective and less prone to error. In this way, financial services are decentralized and made flatter. Information asymmetry presents itself through ex ante adverse selection and ex post moral hazard. The stakeholders such as creditors and investors have difficulties in obtaining and transforming the in-formation about the borrowers and issuers. However, digitization and information technologies may help overcome this constraint. The key issue with the use of such information is its reliability, which can be mitigated if the online platforms have credible verifiability standards. An alternative view is based on social networks. Social networks can provide information relevant to the borrowers and firms. The well-established internet platforms can significantly reduce search costs through the features of decentralization and disintermediation. “Information technology alters the very way in which users interact and connect with each other, resulting in the
generation of alternative sources of information and social capital, and new means of transmitting the information efficiently. The net effect of these forces is to facilitate the growth of lending networks that are decentralized”
Second, networked access to financial services facilitates quicker access to all manner of transactions from checking financial status, making payments, and withdrawing and transferring funds. Third, they facilitate the activities of existing financial institutions. This involves the use of big data to deliver a more efficient service, but it also allows firms to use technology to manage legal risk more effectively. Fourth, in the absence of industry-wide standardization (i.e., no capital requirements as for banks) it is clear that crowdfunding and P2P platforms enjoy lower operating and capital expenses compared to traditional banks. Finally, FinTech creates efficiencies and competition that reduces online risk but also making SMEs more profitable (WEF 2015). In particular, app-based companies are emerging everywhere.Schwienbacher and Larralde provide an overview of nascent equity crowdfunding literature in relation to en-trepreneurial finance, in which they discuss why founders choose this source of funding. Hornuf and Schwienbacher compare crowdfunding to different entrepreneurial financing options. Hemer emphasizes that the funding process itself is the decisive difference because investors make their decisions based on the information provided therein. Schwienbacher sug-gests that one benefit of crowdfunding is reduced operating risks
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